Be familiar with the ethical issues faced by international businesses.

2.

Recognize an ethical dilemma.

3.

Discuss the causes of unethical behavior by managers.

4.

Be familiar with the different philosophicalapproaches to ethics.

5.

Know what managers can do to incorporate ethical considerations into theirdecision making.

Apple’s iPod Plant

In mid-2006 news reports surfaced suggesting that there were systematic labor abuses at thefactory in China that makes the

iconic iPod for Apple Computer. According to the reports,workers at Hongfujin Precision Industries were paid as little as $50 a month to work 15-hourshifts making the iPod. There were also reports of forced overtime and poor living conditions forthe workers, many of whom were young women who had migrated in from the countryside towork at the plant and lived in company-owned dormitories. The articles were the work of twoChinese journalists, Wang You and Weng Bao, employed by China Business News, a state-runnewspaper. The target of the reports, Hongfujin Precision Industries, was reportedly China’slargest export manufacturer in 2005 with overseas sales totaling $14.5 billion. Hongfujin isowned by Foxconn, a large Taiwanese conglomerate, whose customers in addition to Appleinclude Intel, Dell Computer, and Sony Corporation. The Hongfujin factory is a small city in itsown right, with clinics, recreational facilities, buses, and 13 restaurants that serve the 200,000employees.

Upon hearing the news, management at Apple responded quickly, pledging to audit theoperations to make sure that Hongfujin was complying with Apple’s code on labor standards forsubcontractors. Managers at Hongfujin took a somewhat different tack—they filed a defamationsuit against the two journalists, suing them for $3.8 million in a local court, which promptlyfroze the journalists’ personal assets pending a trial. Clearly, the management of Hongfujin wastrying to send a message to the journalist community: criticism would be costly. The suit sent achill through the Chinese journalist community since Chinese courts have shown a tendency tofavor powerful locally based companies in legal proceedings.

Within six weeks, Apple had completed its audit. The company’s report suggestedthat althoughworkers had not been forced to work overtime, and were earning at least the local minimumwage, many had worked more than the 60 hours a week that Apple allowed, and their housingwas substandard. Under pressure from Apple, management at Hongfujin agreed to bring theirpractices in line with Apple’s code, committing themselves to building new housing foremployees and limiting work to 60 hours a week.

However, Hongfujin did not immediately withdraw the defamation suit. In an unusually boldmove in a country where censorship is still commonplace, Chinese Business News gave itsunconditional backing to Wang and Weng. The Shanghai-based news organization issued astatement arguing that what the two journalists did “was not a violation of any rules, laws orjournalistic ethics.” The Paris-based group, Reporters Without Borders, also took up the case ofWang and Weng, writing a letter to Apple’s CEO Steve Jobs that stated, “We believe that allWang and Weng did was to report the facts and we condemnFoxconn’s reaction. We thereforeask you to intercede on behalf of these two journalists so that their assets are unfrozen and thelawsuit is dropped.”

Once again, Apple moved quickly, pressuring Foxconn behind the scenes to drop the suit. Inearly September, Foxconn agreed to do so and issued a “face saving” statement saying that thetwo sides had agreed to end the dispute after apologizing to each other “for the disturbancesbrought to both of them by the lawsuit.” While the dispute is now over, the experience shed aharsh light on labor conditions in China. At the same time, the response of the Chinese media,and China Business News in particular, points toward the emergence of some journalist freedomsin a nation that has historically seen news organizations as a mouthpiece for the state.1

Introduction

As Apple discovered, ethical issues can arise when companies do business in different nations.These issues are often a function of differences in economicdevelopment, politics, legal systems,and culture. While managers at Hongfujin were not breaking local laws, their treatment ofemployees was arguably unethical when judged by Western standards. Moreover, many wouldargue that it is unethical for a company

like Apple to work with a foreign supplier that treats itsemployees poorly. Managers at Apple had already anticipated this kind of problem and had acode on labor standards in place. When news of the labor conditions at Hongfujin surfaced,Apple management responded appropriately, quickly auditing Hongfujin’s operations andrequiring that the company change certain practices—although a skeptic might wonder, however,why it took damaging news to get Apple to audit Hongfujin. Apple management should probablyhave been auditing Hongfujin’s operations on a regular basis, which apparently they were not.

As we shall see repeatedly in this chapter, not all companies have been able to deal with ethicalproblems in as timely a manner as Apple. There are many examples of managers who made poorethical decisions while engaged in international business. The termethics

refers to acceptedprinciples of right or wrong that govern the conduct of a person, the members of a profession, orthe actions of an organization.Business ethics

are the accepted principles of right or wronggoverning the conduct of businesspeople, and anethical strategy

is a strategy, or course ofaction, that does not violate these accepted principles. This chapter looks at how ethical issuesshould be incorporated into decision making in an international business. We start by looking atthe source and nature of ethical

issues in an international business. Next, we review the reasonsfor poor ethical decision making. Then we discuss different philosophical approaches to businessethics. We close the chapter by reviewing the different processes managers can adopt to makesure ethical considerations are incorporated into decision making in an international businessfirm.

Ethical Issues in International Business

Many of the ethical issues in international business are rooted in the fact that political systems,law, economicdevelopment, and culture vary significantly from nation to nation. What isconsidered normal practice in one nation may be considered unethical in another. Because theywork for an institution that transcends national borders and cultures, managers in a multinationalfirm need to be particularly sensitive to these differences. In the international business setting,the most common ethical issues involve employment practices, human rights, environmentalregulations, corruption, and the moral obligation of multinational corporations.

Employment Practices

When work conditions in a host nation are clearly inferior to those in a multinational’s homenation, what standards should be applied—those of the home nation, those of the host nation, orsomething in between? While few would suggest that pay and work conditions should be thesame across nations, how much divergence is acceptable? For example, while 12-hour workdays,extremely low pay, and a failure to protect workers against toxic chemicals may be common insome developing nations, does this mean it is OK for a multinational to tolerate such workingconditions in its subsidiaries there, or to condone it by using local subcontractors?

Like Apple, in the 1990s, Nike found itself the center of a storm of protests when news reportsrevealed that working conditions at many of its subcontractors were very poor. Typical of theallegations were those detailed in a48 Hours

program that aired in 1996. The report painted apicture of young women at a Vietnamese subcontractor who worked with toxic materials sixdays a week in poor conditions for only 20 cents an hour. The report also stated that a livingwage in Vietnam was at least $3 a day, an income that could not be achieved at the subcontractorwithout working substantial overtime. Nike and its subcontractors were not breaking any laws,but this report, and others like it, raised questions about the ethics of using sweatshop labor tomake what were essentially fashion accessories. It may have been legal, but was it ethical to usesubcontractors who by Western standards clearly exploited their workforce? Nike’s criticsthought not, and the company found itself the focus of a wave of demonstrations and consumerboycotts. These exposés surrounding Nike’s use of subcontractors forced the company toreexamine its policies. Realizing that, even though it was breaking no law, its subcontractingpolicies were perceived as unethical, Nike’s management established a code of conduct for Nikesubcontractors and instituted annual monitoring by independent auditors of all subcontractors.2

As the Nike and Apple cases demonstrate, a strong argument can be made that it is not OK for amultinational firm to tolerate poor working conditions

in its foreign operations, or those ofsubcontractors. However, this still leaves unanswered the question of what standards should beapplied. We shall return to and consider this issue in more detail later in the chapter. For now,note that establishingminimal acceptable standards that safeguard the basic rights and dignity ofemployees, auditing foreign subsidiaries and subcontractors on a regular basis to make sure thosestandards are met, and taking corrective action if they are not is a good way to guard againstethical abuses. Another apparel company, Levi Strauss, has long taken such an approach. Thecompany terminated a long-term contract with one of its large suppliers, the Tan family, afterdiscovering that the Tans were allegedly forcing 1,200 Chinese and Filipino women to work 74hours per week in guarded compounds on the Mariana Islands.3

Human Rights

Questions of human rights can arise in international business. Basic human rights still are not

respected in many nations. Rights that we take for granted in developed nations, such as freedomof association, freedom of speech, freedom of assembly, freedom of movement, freedom frompolitical repression, and so on, are by no means universally accepted (seeChapter 2

for details).One of the most obvious historic examples was South Africa during the days of white rule andapartheid, which did not end until 1994. The apartheid system denied basic political rights to themajority nonwhite population of South Africa, mandated segregation between whites andnonwhites, reserved certain occupations exclusively for whites, and prohibited blacks from beingplaced in positions where they would manage whites. Despite the odious nature of this system,Western businesses operatedin South Africa. By the 1980s, however, many questioned the ethicsof doing so. They argued that inward investment by foreign multinationals, by boosting theSouth African economy, supported the repressive apartheid regime.

Several Western businessesstarted to change their policies in the late 1970s and early 1980s.4

General Motors, which had significant activities in South Africa, was at the forefront of thistrend. GM adopted what came to be called theSullivan principles, named after Leon Sullivan, ablack Baptist minister and a member of GM’s board of directors. Sullivan argued that it wasethically justified for GM to operate in South Africa so long as two conditions were fulfilled.First, the company should not obey the apartheid laws in its own South African operations (aform of passive resistance). Second, the company should do everything within its power topromote the abolition of apartheidlaws. Sullivan’s principles were widely adopted by U.S. firmsoperating in South Africa. The South African government, which clearly did not want toantagonize important foreign investors, ignored their violation of the apartheid laws.

However, after 10 years, Leon Sullivan concluded that simply following the principles was notsufficient to break down the apartheid regime and that any American company, even thoseadhering to his principles, could not ethically justify their continued presence in South Africa.Over the next few years, numerous companies divested their South African operations, includingExxon, General Motors, Kodak, IBM, and Xerox. At the same time, many state pension fundssignaled they would no longer hold stock in companies that did business in South Africa, whichhelped persuade several companies to divest their South African operations. These divestments,coupled with the imposition of economic sanctions from the U.S. and other governments,contributed to the abandonment of white minority rule and apartheid in South Africa and theintroduction of democratic elections in 1994. Thus, some argued that adopting an ethical stancehelped improve human rights in South Africa.5

Although change has

come in South Africa, many repressive regimes still exist in the world. Is itethical for multinationals to do business in them? It is often argued that inward investment by amultinational can be a force for economic, political, and social progress thatultimately improvesthe rights of people in repressive regimes. This position was first discussed inChapter 2, whenwe noted that economic progress in a nation could create pressure for democratization. Ingeneral, this belief suggests it is ethical for a multinational to do business in nations that lack thedemocratic structures and human rights records of developed nations. Investment in China, forexample, is frequently justified on the grounds that although

human rights groups often questionChina’s human rights record, and although the country is not a democracy, continuing inwardinvestment will help boost economic growth and raise living standards. These developments willultimately create pressures fromthe Chinese people for more participative government, politicalpluralism, and freedom of expression and speech.

However, there is a limit to this argument. As in the case of South Africa, some regimes are sorepressive that investment cannot be justifiedon ethical grounds. A current example would beMyanmar (formally known as Burma). Ruled by a military dictatorship for more than 45 years,Myanmar has one of the worst human rights records in the world. Beginning in the mid-1990s,many Western companies exited Myanmar, judging the human rights violations to be so extremethat doing business there cannot be justified on ethical grounds. (In contrast, the accompanyingManagement Focus

looks at the controversysurrounding one company, Unocal, that chose tostay in Myanmar.) However, a cynic might note that Myanmar has a small economy and thatdivestment carries no great economic penalty for Western firms, unlike, for example, divestmentfrom China.

Nigerian women and children protest Royal Dutch/Shell in April 2004.

Nigeria is another country where serious questions have arisen over the extent to which foreignmultinationals doing business in the country have contributed to human rights violations. Mostnotably, the largest foreign oil producer in the country, Royal Dutch Shell, has been repeatedlycriticized.6

In the early 1990s, several ethnic groups in Nigeria, which was ruled by a militarydictatorship, protested against foreign oil companies for causing widespread pollution and failingto invest in the communities from which they extracted oil. Shell reportedly requested theassistance of Nigeria’s Mobile Police Force (MPF) to quell the demonstrations. According to thehuman rights group Amnesty International, the results were bloody. In 1990, the MPF put downprotests against Shell in the village of Umuechem, killing 80 people and destroying 495 homes.In 1993, following protests in the Ogoni region of Nigeria that were designed to stop contractorsfrom laying a new pipeline for Shell, the MPF raided the area to quell the unrest. In the chaosthat followed, it has been alleged that 27 villages were razed, 80,000 Ogoni people displaced,and 2,000 people killed.

Critics argued that Shell shouldered some of the blame for the massacres. Shell neveracknowledged this, and the MPF probably used the demonstrations as a pretext for punishing anethnic group that had been agitating against the central government for some time. Nevertheless,these events did prompt Shell to look at its own ethics and to set up internal mechanisms toensure that its subsidiaries acted in a manner that was consistent with basic human rights.7

Moregenerally, the question remains, what is the responsibility of a foreign multinational whenoperating in a country where basic human rights are trampled on? Should the company be thereat all, and if it is there, what actions should it take to avoid

the situation Shell found itself in?

Management Focus: Unocal in Myanmar

In 1995, Unocal, an oil and gas enterprise based in California, took a 29 percent stake in apartnership with the French oil company Total and state-owned companies from both Myanmarand Thailand to build a gas pipeline from Myanmar to Thailand. At the time, the $1 billionproject was expected to bring Myanmar about $200 million in annual export earnings, a quarterof the country’s total export earnings. The gas used domestically would increase Myanmar’sgenerating capacity by 30 percent. Unocal made this investment when a number of otherAmerican companies were exiting Myanmar. Myanmar’s government, a military dictatorship,had a reputation for brutally suppressing internal dissent. Citing the political climate, the apparelcompanies Levi Strauss and EddieBauer had both withdrawn from the country. However, as faras Unocal’s management was concerned, the giant infrastructure project would generate healthyreturns for the company and, by boosting economic growth, a better life for Myanmar’s 43million people. Moreover, while Levi Strauss and Eddie Bauer could easily shift production ofclothes to another low-cost location, Unocal argued it had to go where the oil and gas werelocated.

However, Unocal’s investment quickly became highly controversial. Under the

terms of thecontract, the government of Myanmar was contractually obliged to clear a corridor for thepipeline through Myanmar’s tropical forests and to protect the pipeline from attacks by thegovernment’s enemies. According to human rights groups, theMyanmar army forcibly movedvillages and ordered hundreds of local peasants to work on the pipeline in conditions that wereno better than slave labor. Those who refused suffered retaliation. News reports cite the case ofone woman who was thrown into a fire, along with her baby, after her husband tried to escapefrom troops forcing him to work on the project. The baby died and she suffered burns. Othervillagers report being beaten, tortured, raped, and otherwise mistreated under the alleged slavelabor conditions.

In 1996, human rights activists brought a lawsuit against Unocal in the United States on behalf of15 Myanmar villagers who had fled to refugee camps in Thailand. The suit claimed that Unocalwas aware of what was going on, even if it did not participate or condone it, and that awarenesswas enough to make Unocal in part responsible for the alleged crimes. The presiding judgedismissed the case, arguing that Unocal could not be held liable for the actions of a foreigngovernment against its own people—although the judge did note that Unocal was indeed awareof what was going on in Myanmar. The plaintiffs appealed, and in late 2003 the case wound upat a superior court. In 2005 the case was settled out of court for an undisclosed amount.11

Environmental Pollution

Ethical issues arise when environmental regulations in host nations are inferior to those in thehome nation. Many developed nations have substantial regulations governing the emission ofpollutants, the dumping of toxic chemicals, the use of toxic materials in the workplace, and soon. Those regulations are often lacking in developing nations, and according to critics, the resultcan be higher levels of pollution from the operations of multinationals than would be allowed athome. For example, consider again the case of foreign oil companies in Nigeria. According to a1992 report prepared by environmental activists in the Niger Delta region of Nigeria,

Apart from air pollution from the oil industry’s emissions and flares day and night, producingpoisonous gases that are silently and systematically wiping out vulnerable airborne biota andendangering the life of plants, game, and man himself, we have widespread water pollution andsoil/land pollution that results in the death of most aquatic eggs and juvenile stages of the life offin fish and shell fish on the one hand, whilst, on the other hand, agricultural land contaminatedwith oil spills becomes dangerous for farming, even where they continue to produce significantyields.8

The implication inherent in this description is that the pollution controls foreign companiesapplied in Nigeria were much more lax than those applied in developed nations.

Should a multinational feel free to pollute in a developing nation? (To do so hardly seemsethical.) Is there a danger that amoral management might move production to a developingnation precisely because costly pollution controls are not required, and the company is thereforefree to despoil the environment and perhaps endanger local people in its quest to lowerproduction costs and gain a competitive advantage? What is the right and moral thing to do insuch circumstances—pollute to gain an economic advantage, or make sure that foreignsubsidiaries adhere to common standards regarding pollution controls?

These questions take on added importance because some parts of the environment are a publicgood that no one owns, but anyone can despoil. No one owns the atmosphere or the oceans, butpolluting both, no matter where the pollution originates, harms all.9

The atmosphere and oceanscan be viewed as a global commons from which everyone benefits but for whichno one isspecifically responsible. In such cases, a phenomenon known as thetragedy of the commons

becomes applicable. The tragedy of the commons occurs when individuals overuse a resourceheld in common by all, but owned by no one, resulting in its degradation. The phenomenon wasfirst named by Garrett Hardin when describing a particular problem in 16th-century England.Large open areas, called commons, were free for all to use as pasture. The poor put out livestockon these commons and supplemented their

meager incomes. It was advantageous for each to putout more and more livestock, but the social consequence was far more livestock than thecommons could handle. The result was overgrazing, degradation of the commons, and the loss ofthis much-needed supplement.10

In the modern world, corporations can contribute to the global tragedy of the commons bymoving production to locations where they are free to pump pollutants into the atmosphere ordump them in oceans or rivers, thereby harming these valuable global commons. While suchaction may be legal, is it ethical? Again, such actions seem to violate basic societal notions ofethics and social responsibility.

Corruption

As noted inChapter 2, corruption has been a problem in almost every society in history, and itcontinues to be one today.12

There always have been and always will be corrupt governmentofficials. International businesses can and have gained economic advantages by makingpayments to those officials. A classic example concerns a well-publicized incident in the 1970s.Carl Kotchian, the president of Lockheed, made a $12.5 million payment to Japanese agents andgovernment officials to secure a large order for Lockheed’s TriStar jet from Nippon Air. Whenthe payments were discovered, U.S. officials charged Lockheed with falsification of its recordsand tax violations. Although such payments were supposed to be an accepted business practice inJapan (they might be viewed as an exceptionally lavish form of gift giving), the revelationscreated a scandal there too. The government ministers in question were criminally charged, onecommitted suicide, the government fell in disgrace, and the Japanese people were outraged.Apparently, such a payment was not an accepted way of doing business in Japan! The paymentwas nothing more than a bribe, paid to corrupt officials, to secure a large order that mightotherwise have gone to another manufacturer, such as Boeing. Kotchian clearly engaged inunethical behavior, and to argue that the payment was an “acceptable form of doing business inJapan” was self-serving and incorrect.

The Lockheed case was the impetus for the 1977 passage of theForeign Corrupt Practices Act

inthe United States, which we first discussed inChapter 2. The act outlawed the paying of bribes toforeign government officials to gain business. Some U.S. businesses immediately objected thatthe act would put U.S. firms at a competitive disadvantage (there is no evidence that this actuallyoccurred).13

The act was subsequently amended to allow for “facilitating payments.” Sometimesknown as speed money or grease payments, facilitating payments arenot

payments to securecontracts that would not otherwise be secured, nor are they payments to obtain exclusivepreferential treatment. Rather they are payments to ensure receiving the standard treatment that abusiness ought to receive from a foreign government, but might not receive due to theobstruction of a foreign official.

In 1997, the trade and finance ministers from the member states of the Organization forEconomic Cooperation and Development (OECD) followed the U.S. lead and adopted theConvention on Combating Bribery of Foreign Public Officials in International BusinessTransactions.14

The convention, which went into force in 1999, obliges member states and othersignatories to makethe bribery of foreign public officials a criminal offense. The conventionexcludes facilitating payments made to expedite routine government action from the convention.To date, some 36 countries have signed the convention, six of whom are not OECD members.

While facilitating payments, or speed money, are excluded from both the Foreign CorruptPractices Act and the OECD convention on bribery, the ethical implications of making suchpayments are unclear. In many countries, payoffs to government officials in

the form of speedmoney are a part of life. One can argue that not investing because government officials demandspeed money ignores the fact that such investment can bring substantial benefits to the localpopulace in terms of income and jobs. From a pragmatic standpoint, giving bribes, although alittle evil, might be the price that must be paid to do a greater good (assuming the investmentcreates jobs where none existed and assuming the practice is not illegal). Several economistsadvocate this reasoning, suggesting that in the context of pervasive and cumbersome regulationsin developing countries, corruption may improve efficiency and help growth! These economiststheorize that in a country where preexisting political structures distort or limit the workings ofthe market mechanism, corruption in the form of black-marketeering, smuggling, and sidepayments to government bureaucrats to “speed up” approval for business investments mayenhance welfare.15

Arguments such as this persuaded the U.S. Congress to exempt facilitatingpayments from the Foreign Corrupt Practices Act.

In contrast, other economists have argued that corruption reduces the returns on businessinvestment and leads to low economic growth.16

In a country where corruption is common,unproductive bureaucrats who demand side payments for granting the enterprise permission tooperate may siphon off the profits from a business activity. This reduces businesses’ incentive toinvest and may retard a country’s economic growth rate. One study of the connection betweencorruption and economic growth in 70 countries found that corruption had a significant negativeimpact on a country’s growth rate.17

Given the debate and the complexity of this issue, one again might conclude that generalizationis difficult and the demand for speed money creates a genuine ethical dilemma. Yes, corruptionis bad, and yes,it may harm a country’s economic development, but yes, there are also caseswhere side payments to government officials can remove the bureaucratic barriers to investmentsthat create jobs. However, this pragmatic stance ignores the fact that corruption tends to corruptboth the bribe giver and the bribe taker. Corruption feeds on itself, and once an individual startsdown the road of corruption, pulling back may be difficult if not impossible. This argumentstrengthens the ethical case for never engaging in corruption, no matter how compelling thebenefits might seem.

Many multinationals have accepted this argument. The large oil multinational, BP, for example,has a zero-tolerance approach toward facilitating payments. Other corporations have a morenuanced approach. For example, consider the following from the code of ethics at Dow Corning:

Dow Corning employees will not authorize or give payments or gifts to government employeesor their beneficiaries or anyone else in order to obtain or retain business.Facilitating payments toexpedite the performance of routine services are strongly discouraged. In countries where localbusiness practice dictates such payments and there is no alternative, facilitating payments are tobe for the minimum amount necessaryand must be accurately documented and recorded.18

This statement allows for facilitating payments when “there is no alternative,” although they arestrongly discouraged.

Moral Obligations

Multinational corporations have power that comes from their control over resources and theirability to move production from country to country. Although that power is constrained not onlyby laws and regulations but also by the discipline of the market and the competitive process, it isnevertheless substantial. Some moral philosophers argue that with power comes the socialresponsibility for multinationals to give something back to the societies that enable them toprosper and grow. The concept ofsocial responsibility

refers to the idea that businesspeopleshould consider the social consequences of economic actions when making business decisions,and that there should be a presumption in favor of decisions that have both good economic andsocial consequences.19

In its purest form, social responsibility can be supported for its own sakesimply because it is the right way for a business to behave. Advocates

andgive something back to the societies that have made their success possible.Noblesse oblige

is aFrench term that refers to honorable and benevolent behavior considered the responsibility ofpeople of high (noble) birth. In a business setting, it is taken to mean benevolent behavior that isthe responsibility ofsuccessful

enterprises. Businesspeople have long recognized the concept,resulting in a substantial and venerable history of corporate giving to society and socialinvestments designed to enhance the welfare of the communities in which businesses operate.

However, some multinationals have abused their power for private gain. The most famoushistoric example relates to one of the earliest multinationals, the British East India Company.Established in 1600, the East India Company grew to dominate the entire Indian subcontinent inthe 19th century. At the height of its power, the company deployed over 40 warships, possessedthe largest standing army in the world, was the de facto ruler of India’s 240 million people, andeven hired its own church bishops, extending its dominance into the spiritual realm.20

Power itself is morally neutral—how power is used is what matters. It can be used in a positiveway to increase social welfare, which is ethical, or it can be used in a manner that is ethically andmorally suspect. Consider the case of News Corporation, one of the largest media conglomeratesin the world, which is profiled in the accompanyingManagement Focus. The power of mediacompanies derives from their ability to shape public perceptions by the material they choose topublish. News Corporation founder and CEO Rupert Murdoch has long considered China to beone of the most promising media markets in the world and has sought permission to expandNews Corporation’s operations in China, particularly the satellite broadcasting operations of StarTV. Some critics believe that Murdoch used the power of News Corporation in an unethical

wayto attain this objective.

Some multinationals have acknowledged a moral obligation to use their power to enhance socialwelfare in the communities where they do business. BP, one of the world’s largest oil companies,has made it part of the company policy to undertake “social investments” in the countries whereit does business.21

In Algeria, BP has been investing in a major project to develop gas fields nearthe desert town of Salah. When the company noticed the lack of clean water in Salah, it built twodesalination plants to provide drinking water for the local community and distributed containersto residents so they could take water from the plants to their homes. There was no economicreason for BP

to make this social investment, but the company believes it is morally obligated touse its power in constructive ways. The action, while a small thing for BP, is a very importantthing for the local community.

Management Focus: News Corporation in China

Rupert Murdoch built News Corporation into one of the largest media conglomerates in theworld with interests that include newspapers, publishing, and television broadcasting. Accordingto critics, however, Murdoch abused his power to gain preferential access to the Chinese mediamarket by systematically suppressing media content that was critical of China and publishingmaterial designed to ingratiate the company with the Chinese leadership.

In 1994, News Corporation excluded BBC news broadcasts from Star

TV coverage in the regionafter it had become clear that Chinese politicians were unhappy with the BBC’s continualreference to repression in China and, most notably, the 1989 massacre of student protesters fordemocracy in Beijing’s Tiananmen Square. In1995, News Corporation’s book publishingsubsidiary, HarperCollins, published a flattering biography of Deng Xiaoping, the former leaderof China, written by his daughter. Then in 1998, HarperCollins dropped plans to publish thememoirs of Chris Patten, the last governor of Hong Kong before its transfer to the Chinese.Patten, a critic of Chinese leaders, had aroused their wrath by attempting to introduce a degree ofdemocracy into the administration of the old British territory before its transfer back toChina in1997.

In a 1998 interview inVanity Fair,

Murdoch took another opportunity to ingratiate himself withthe Chinese leadership when he described the Dalai Lama, the exiled leader of Chinese-occupiedTibet, as “a very political old monk shuffling around in Gucci shoes.” On the heels of this, in2001 Murdoch’s son James, who was in charge of running Star TV, made disparaging remarksabout Falun Gong, a spiritual movement involving breathing exercises and meditation that hadbecome so popular in China that the Communist regime regarded it as a political threat andsuppressed its activities. According to James Murdoch, Falun Gong was a “dangerous,”“apocalyptic cult” that “clearly does not have the success of China at heart.”

Critics argued that these events were all part of a deliberate effort on the part of NewsCorporation to curry favor with the Chinese. The company received its reward in 2001 when StarTV struck an agreement with the Chinese government to launch a Mandarin-languageentertainment channel for the affluent southern coastal province of Guangdong. Earlier that year,China’s leader, Jiang Zemin, had publicly praised Murdoch and Star TV for their efforts “topresent China objectively and to cooperate with the Chinese press.”

Once in China, News Corp was soon tugging at the constraints imposed on it by the Chinesegovernment. Starting in 2002, News Corp set up shell companies, owned by News Corpemployees, which then resold News Corp programming to local cable TV networks throughoutChina, in direct violation of Chinese regulations. Payments, sometimes in the form of briefcasesstuffed with cash, were channeled to News Corp through the shell companies. One such dealinvolved selling News Corp programming through a shell company known as Runde InvestmentCorporation to a nationwide satellite TV channel, Qinghai Satellite, based in the remote Qinghaiprovince of China. Runde was partly owned by the son of the former hard-line Communist Partypropaganda minister, Ding Guangen. If News Corp was hoping that its political connectionswould help it to get away with these actions, it was badly disappointed. In 2005, Chineseauthorities raided News Corp’s headquarters and seized documents and equipment. They alsoquickly terminated the deal with Qinghai Satellite.22

Ethical Dilemmas

The ethical obligations of a multinational corporation toward employment conditions, humanrights, corruption, environmental pollution, and the use of power are not always clear-cut. Theremay be no agreement about accepted ethical principles. From an international businessperspective, some argue that what is ethical depends upon one’s cultural perspective.23

In theUnited States,

it is considered acceptable to execute murderers but in many cultures this is notacceptable—execution is viewed as an affront to human dignity and the death penalty isoutlawed. Many Americans find this attitude very strange, but many Europeans find theAmerican approach barbaric. For a more business-oriented example, consider the practice of“gift giving” between the parties to a business negotiation. While this is considered right andproper behavior in many Asian cultures, some Westerners view the practice as a form of bribery,and therefore unethical, particularly if the gifts are substantial.

Managers often confront very real ethical dilemmas where the appropriate course of action is notclear. For example, imagine that a visiting American executive finds that a foreign subsidiary ina poor nation has hired a 12-year-old girl to work on a factory floor. Appalled to find that thesubsidiary is using child labor in direct violation of the company’s own ethical code, theAmerican instructs the local manager to replace the child with an adult. The local managerdutifully complies. The girl, an orphan, who is the only breadwinner for herself and her 6-year-old brother, is unable to find another job, so in desperation she turns to prostitution. Two yearslater she dies of AIDS. Meanwhile, her brother takes up begging. He encounters the Americanwhile begging outside the local McDonald’s. Unaware that this was the man responsible for hisfate, the boy begs him for money. The American quickens his pace and walks

rapidly past theoutstretched hand into the McDonald’s, where he orders a quarter-pound cheeseburger with friesand a cold milk shake. A year later, the boy contracts tuberculosis and dies.

Had the visiting American understood the gravity of the girl’s situation, would he still haverequested her replacement? Perhaps not! Would it have been better, therefore, to stick with thestatus quo and allow the girl to continue working? Probably not, because that would haveviolated the reasonable prohibition against child labor found in the company’s own ethical code.What, then, would have been the right thing to do? What was the obligation of the executivegiven this ethical dilemma?

There is no easy answer to these questions. That is the nature ofethical dilemmas—they aresituations in which none of the available alternatives seems ethically acceptable.24

In this case,employing child labor was notacceptable, but neither was denying the child her only source ofincome. What the American executive needed, what all managers need, was a moral compass, orperhaps an ethical algorithm, that would guide him through such an ethical dilemma to find anacceptable solution. Later we will outline what such a moral compass, or ethical algorithm,might look like. For now, it is enough to note that ethical dilemmas exist because many real-world decisions are complex, difficult to frame, and involve first-, second-, and third-orderconsequences that are hard to quantify. Doing the right thing, or even knowing what the rightthing might be, is often far from easy.25

The Roots of Unethical Behavior

As we have seen, examples abound of managers behaving in a manner that might be judgedunethical in an international business setting. Why do managers behave in an unethical manner?There is no simple answer to this question, for the causes are complex, but some generalizationscan be made (seeFigure 4.1).26

Figure 4.1 Determinants of Ethical Behavior

Personal Ethics

Business ethics are not divorced frompersonal ethics, which are the generally acceptedprinciples of right and wrong governing the conduct of individuals. As individuals, we aretypically taught that it is wrong to lie and cheat—it is unethical—and that it is right to behavewith integrity and honor and to stand up for what we believe to be right. This is generally trueacross societies. The personal ethical code that guides our behavior comes from a number ofsources, including our parents, our schools, our religion, and the media. Our personal ethicalcode exerts a profound influence on the way we behave as businesspeople. An individual with astrong sense of personal ethics is less likely to behave in an unethical manner in a businesssetting. It follows that the first step to establishing a strong sense of business ethics is for asociety to emphasize strong personal ethics.

Home-country managers working abroad in multinational firms (expatriate managers) mayexperience more than the usual degree of pressure to violate their personal ethics. They are awayfrom their ordinary social context and supporting culture, and they are psychologically andgeographically distant from the parent company. They may be based in a culture that does notplace

the same value on ethical norms important in the manager’s home country, and they maybe surrounded by local employees who have less rigorous ethical standards. The parent companymay pressure expatriate managers to meet unrealistic goals that can only be

fulfilled by cuttingcorners or acting unethically. For example, to meet centrally mandated performance goals,expatriate managers might give bribes to win contracts or establish working conditions andenvironmental controls that are below minimal acceptable standards. Local managers mightencourage the expatriate to adopt such behavior. Due to its geographical distance, the parentcompany may be unable to see how expatriate managers are meeting goals, or they may choosenot to see how they are doing so, allowing such behavior to flourish and persist.

Decision-Making Processes

Several studies of unethical behavior in a business setting have concluded that businesspeoplesometimes do not realize they are behaving unethically, primarily because they simply fail toask, “Is this decision or action ethical?”27

Instead, they apply a straightforward business calculusto what they perceive to be a business decision, forgetting that the decision may also have animportant ethical dimension. The fault lies in processes that do not incorporate ethicalconsiderations into business decision making. This may have been the case at Nike whenmanagers originally made subcontracting decisions (see the earlier discussion). Those decisionswere probably made based on good economic logic. Subcontractors were probably chosen basedon business variables such as cost, delivery, and product quality, and the key managers simplyfailed to ask, “How does this subcontractor treat its workforce?” If they thought about thequestion at all, they probably reasoned that it was the subcontractor’s concern, not theirs. (Foranother example of a business decision that may have been unethical, see theManagement Focus

describing Pfizer’s decision to test an experimental drug on children suffering from meningitis inNigeria.)

Organization Culture

The climate in some businesses does not encourage people to think through the ethicalconsequences of business decisions. This brings us to the third cause of unethical behavior inbusinesses—an organizational culture that deemphasizes business ethics, reducing all decisionsto the purely economic. The termorganization culture

refers to the values and norms thatemployees of an organization share. You will recall fromChapter 3

thatvalues

are abstract ideasabout what a group believes to be good, right, and desirable, whilenorms

are the social rules andguidelines that prescribe appropriate behavior in particular situations. Just as societies havecultures, so do business organizations. Together, values and norms shape the culture of abusiness organization, and that culture has an important influence on the ethics of businessdecision making.

Management Focus: Pfizer’s Drug Testing Strategy in Nigeria

The drug development process is long, risky, and expensive. It can take 10 years and cost inexcess of $500 million to develop a new drug. Moreover, between 80 and 90 percent of drugcandidates fail in clinical trials. Pharmaceutical companies rely upon a handful of successes topay for their failures. Among the most successful of the world’s pharmaceutical companies isNew York–based Pfizer. Given the risks and costs of developing a new drug, pharmaceuticalcompanies will jump at opportunities to reduce them, and in 1996 Pfizer thought it saw one.

Pfizer had been developing a novel antibiotic, Trovan, that was proving to be useful in treating awide range of bacterial infections. Wall Street analysts were predicting that Trovan could be ablockbuster, one of a handful of drugs capable of generating sales of more than $1 billion a year.In 1996, Pfizer was pushing to submit data on Trovan’s efficacy to the Food and DrugAdministration (FDA) for review. A favorable review would allow Pfizer to

sell the drug in theUnited States, the world’s largest market. Pfizer wanted the drug to be approved for both adultsand children, but it was having trouble finding sufficient numbers of sick children in the UnitedStates to test the drug on. Then in early 1996, a researcher at Pfizer read about an emergingepidemic of bacterial meningitis in Kano, Nigeria. This seemed like a quick way to test the drugon a large number of sick children.

Within weeks a team of six doctors had flown to Kano and were administering the drug, in oralform, to children with meningitis. Desperate for help, Nigerian authorities allowed Pfizer to givethe drug to children (the epidemic would ultimately kill nearly 16,000 people). Over the next fewweeks, Pfizer treated 198 children. The protocol called for half the patients to get Trovan andhalf to get a comparison antibiotic already approved for the treatment of children. After a fewweeks, the Pfizer team left, the experiment complete. Trovan seemed to be about as effective andsafe as the already approved antibiotic. The data from the trial were put into a package with datafrom other trials of Trovan and delivered to the FDA.

Questions were soon raised about the nature of Pfizer’s experiment. Allegations charged that thePfizer

team kept children on Trovan, even after they failed to show a response to the drug,instead of switching them quickly to another drug. The result, according to critics, was that somechildren died who might have been saved had they been taken off Trovansooner. Questions werealso raised about the safety of the oral formulation of Trovan, which some doctors feared mightlead to arthritis in children. Fifteen children who took Trovan showed signs of joint pain duringthe experiment, three times the rate of

children taking the other antibiotic. Then there werequestions about consent. The FDA requires that patient (or parent) consent be given beforepatients are enrolled in clinical trials, no matter where in the world the trials are conducted.Critics argue

that in the rush to get the trial established in Nigeria, Pfizer did not follow properprocedures, and that many parents of the infected children did not know their children wereparticipating in a trial for an experimental drug. Many of the parents wereilliterate, could notread the consent forms, and had to rely upon the questionable translation of the Nigerian nursingstaff. Pfizer rejected these charges and contends that it did nothing wrong.

Trovan was approved by the FDA for use in adults in 1997, but it was never approved for use inchildren. Launched in 1998, by 1999 there were reports that up to 140 patients in Europe hadsuffered liver damage after taking Trovan. The FDA subsequently restricted the use of Trovan tothose cases where the benefitsof treatment outweighed the risk of liver damage. Europeanregulators banned sales of the drug.29

Former Enron CEO Kenneth Lay was charged with a variety of criminal deeds.

Author Robert Bryce has explained how the organization culture at now-bankrupt multinationalenergy company Enron was built on values that emphasized greed and deception.28

According toBryce, the tone was set by top managers who engaged

in self-dealing to enrich themselves andtheir own families. Bryce tells how former Enron CEO Kenneth Lay made sure his own familybenefited handsomely from Enron. Much of Enron’s corporate travel business was handled by atravel agency in which Lay’s sister was a part-owner. When an internal auditor recommendedthat the company could do better by using another travel agency, he soon found himself out of ajob. In 1997, Enron acquired a company owned by Kenneth Lay’s son, Mark Lay, which wastrying to establish a business trading paper and pulp products. At the time, Mark Lay and anothercompany he controlled were targets of a federal criminal investigation of bankruptcy fraud andembezzlement. As part of the deal, Enron hired Mark Lay as an executive witha three-yearcontract that guaranteed him at least $1 million in pay over that period, plus options to purchaseabout 20,000 shares of Enron. Bryce also details how Lay’s grown daughter used an Enron jet totransport her king-sized bed to France. With Kenneth Lay as an example, it is perhaps notsurprising that self-dealing soon became endemic at Enron. The most notable example was ChiefFinancial Officer Andrew Fastow, who set up “off balance sheet” partnerships that not only hidEnron’s true financial condition from investors but also paid tens of millions of dollars directlyto Fastow. (Fastow was subsequently indicted by the government for criminal fraud and went tojail.)

Unrealistic Performance Expectations

A fourth cause of unethical behavior has already been hinted at—it is pressure from the parentcompany to meet unrealistic performance goals that can be attained only by cutting corners oracting in an unethical manner. Again, Bryce discusses how this mayhave occurred at Enron.Lay’s successor as CEO, Jeff Skilling, put a performance evaluation system in place that weededout 15 percent of underperformers every six months. This created a pressure-cooker culture witha myopic focus on short-run performance,

and some executives and energy traders responded tothat pressure by falsifying their performance—inflating the value of trades, for example—tomake it look as if they were performing better than was actually the case.

The lesson from the Enron debacle is

that an organizational culture can legitimize behavior thatsociety would judge as unethical, particularly when the culture is combined with a focus onunrealistic performance goals, such as maximizing short-term economic performance, no matterwhat the costs. In such circumstances, there is a greater than average probability that managerswill violate their own personal ethics and engage in unethical behavior. Conversely, anorganization culture can do just the opposite and reinforce the need for ethicalbehavior. AtHewlett-Packard, for example, Bill Hewlett and David Packard, the company’s founders,propagated a set of values known as The HP Way. These values, which shape the way businessis conducted both within and by the corporation, have an important

ethical component. Amongother things, they stress the need for confidence in and respect for people, open communication,and concern for the individual employee.

Leadership

The Enron and Hewlett-Packard examples suggest a fifth root cause of unethical behavior—leadership. Leaders help to establish the culture of an organization, and they set the example thatothers follow. Other employees in a business often take their cue from business leaders, and ifthose leaders do not behave in an ethical manner, they might not either. It is not what leaders saythat matters, but what they do. Enron, for example, had a code of ethics that Kenneth Layhimself often referred to, but Lay’s own actions to enrich family members spoke louder than anywords.

Philosophical Approaches to Ethics

We shall look at several different approaches to business ethics here, beginning with some thatcan best be described as straw men, which either deny the value of business ethics or apply theconcept in a very unsatisfactory way. Havingdiscussed, and dismissed, the straw men, we thenmove on to consider approaches that most moral philosophers favor and that form the basis forcurrent models of ethical behavior in international businesses.

Straw Men

Business ethics scholars discuss some approaches to business ethics primarily to demonstratethat they offer inappropriate guidelines for ethical decision making in a multinational enterprise.Four such approaches to business ethics are commonly discussed in the literature: the Friedmandoctrine, cultural relativism, the righteous moralist, and the naive immoralist. All of theseapproaches have some inherent value, but all are unsatisfactory in important ways. Nevertheless,sometimes companies adopt these approaches.

The Friedman Doctrine

The Nobel Prize–winning economist Milton Friedman wrote an article in 1970 that has sincebecome a classic straw man that business ethics scholars outline only to tear down.30

Friedman’sbasic position is that the only social responsibility of business is to increase profits, so long as thecompany stays within the rules of law. He explicitly rejects the idea that businesses shouldundertake social expenditures beyond those mandated by the law and required for the

efficientrunning of a business. For example, his arguments suggest that improving working conditionsbeyond the level required by the lawand

necessary to maximize employee productivity willreduce profits and is therefore not appropriate. His belief is that a firm should maximize itsprofits because that is the way to maximize the returns that accrue to the owners of the firm, itsstockholders. If stockholders then wish to use the proceeds to make social investments, that istheir right, according to Friedman, but managers of the firm should not make that decision forthem.

Although Friedman is talking about social responsibility, rather than business ethics per se, manybusiness ethics scholars equate social responsibility with ethical behavior and thus believeFriedman is also arguing against business ethics. However, the assumption that Friedman isarguing against ethics is not quite true, for Friedman does state,

There is one and only one social responsibility of business—to use its resources and engage inactivities designed to increase its profits so long as it stays within the rules of the game, which isto say that it engages in open andfree competition without deception or fraud.31

In other words, Friedman states that businesses should behave in an ethical manner and not usedeception and fraud.

Nevertheless, Friedman’s arguments do break

down under examination. This is particularly truein international business where the “rules of the game” are not well established and differ fromcountry to county. Consider again the case of sweatshop labor. Child labor may not be againstthe law in a developing nation, and maximizing productivity may not require that a multinationalfirm stop using child labor in that country, but it is still immoral to use child labor because thepractice conflicts with widely held views about what is the right and proper thing to do.Similarly, there may be no rules against pollution in a developed nation and spending money onpollution control may reduce the profit rate of the firm, but generalized notions of moralitywould hold that it is still unethical to dump toxic pollutants into rivers or foul the air with gasreleases. In addition to the local consequences of such pollution, which may have serious healtheffects for the surrounding population, it also has global consequences as pollutants degradethose two global commons so important to us all—the atmosphere and the oceans.

Cultural Relativism

Another straw man that business ethics scholars often raise iscultural relativism, which is thebelief that ethics are

nothing more than the reflection of a culture—all ethics are culturallydetermined—and that accordingly, a firm should adopt the ethics of the culture in which it isoperating.32

This approach is often summarized by the maximwhen in Rome do as the Romansdo. As with Friedman’s approach, cultural relativism does not stand up to a closer look. At itsextreme, cultural relativism suggests that if a culture supports slavery, it is OK to use slave laborin a country. Clearly, it is not! Cultural relativism implicitly rejects the idea that universalnotions of morality transcend different cultures, but, as we shall argue later in the chapter, someuniversal notions of morality are found across cultures.

While dismissing cultural relativism in its most sweeping form, some ethicists argue that there isresidual value in this approach.33

As we noted inChapter 3, societalvalues and norms do varyfrom culture to culture—customs do differ, so it might follow that certain business practices areethical in one country, but not another. Indeed, the facilitating payments allowed in the ForeignCorrupt Practices Act can be seen as an acknowledgment that in some countries, the payment ofspeed money to government officials is necessary to get business done, and if not ethicallydesirable, it is at least ethically acceptable.

However, not all ethicists or companies agree with this pragmatic view. As noted earlier, oilcompany BP explicitly states it will not make facilitating payments, no matter what theprevailing cultural norms are. In 2002, BP enacted a zero-tolerance policy for facilitationpayments, primarily on the basis that such payments are a low-level form of corruption, and thuscannot be justified because corruption corrupts both the bribe giver and the bribe taker andperpetuates the corrupt system. As BP notes on its Web site, because of its zero-tolerance policy:

Some oil product sales in Vietnam involved inappropriate commission payments to the managersof customers in return for placing orders with BP. These were stopped during 2002 with theresult that BP failed to win certain tenders with potential profit totaling $300k. In addition, twosales managers resigned over the issue. The business, however, has recovered using moretraditional sales methods and has exceeded its targets at year-end.34

BP’s experience suggests that companies should not use cultural relativism as an argument forjustifying behavior that is clearly based upon suspect ethical grounds, even if that behavior isboth legal and routinely accepted in the country where the company is doing business.

The Righteous Moralist

Arighteous moralist

claims that a multinational’s home-country standards of ethics are theappropriate ones for companies to follow in foreign countries. This approach is typicallyassociated with managers from developed nations. While this seems reasonable at first blush, theapproach can create problems. Consider the following example: An American bank manager wassent to Italy, where he was appalled to learn that the local branch’s accounting departmentrecommended grossly underreporting the bank’s profits for income tax purposes.35

The managerinsisted that the bank report its earnings accurately, American style. When he was called by theItalian tax department to the firm’s tax hearing, he was told the firm owed three times as muchtax as it had paid, reflecting the department’s standard assumption that each firm underreports itsearnings by two-thirds. Despite his protests, the new assessment stood. In this case, the righteousmoralist has run into a problem caused by the prevailing cultural norms in the country where heis doing business. How should he respond? The righteous moralist would argue for maintainingthe position, while a more pragmatic view might be that in this case, the right thing to do is tofollow the prevailing cultural norms, since there is a big penalty for notdoing so.

The main criticism of the righteous moralist approach is that its proponents go too far. Whilethere are some universal moral principles that should not be violated, it does not always followthat the appropriate thing to do is adopt home-country

standards. For example, U.S. laws setdown strict guidelines with regard to minimum wage and working conditions. Does this mean itis ethical to apply the same guidelines in a foreign country, paying people the same as they arepaid in the United States,providing the same benefits and working conditions? Probably not,because doing so might nullify the reason for investing in that country and therefore deny localsthe benefits of inward investment by the multinational. Clearly, a more nuanced approach isneeded.

The Naive Immoralist

Anaive immoralist

asserts that if a manager of a multinational sees that firms from other nationsare not following ethical norms in a host nation, that manager should noteither. The classicexample to illustrate the approach is known as the drug lord problem. In one variant of thisproblem, an American manager in Colombia routinely pays off the local drug lord to guaranteethat his plant will not be bombed and that none of

his employees will be kidnapped. The managerargues that such payments are ethically defensible because everyone is doing it.

The objection to the manager’s behavior is twofold. First, to say that an action is ethicallyjustified if everyone is doing it is not sufficient. If firms in a country routinely employ 12-year-olds and make them work 10-hour days, is it therefore ethically defensible to do the same?Obviously not, and the company does have a clear choice. It does not have to abide by localpractices, and it can decide not to invest in a country where the practices are particularly odious.Second, the multinational must recognize that it does have the ability to change the prevailingpractice in a country. It can use its power for a positive moral purpose. This is what BP is doingby adopting a zero-tolerance policy with regard to facilitating payments. BP is stating that theprevailing practice of making facilitating payments is ethically wrong, and it is incumbent uponthe company to use its power to try to change the standard. While some might argue that such anapproach smells of moral imperialism and a lack of cultural sensitivity, if it is consistent withwidely accepted moral standards in the global community, it may be ethically justified.

To return to the drug lord problem, an argument can be made that it is ethically defensible tomake such payments, not because everyone else is doing so but because not doing so wouldcause greater harm (i.e., the drug lord might seek retribution and engage in

killings andkidnappings). Another solution to the problem is to refuse to invest in a country where the rule oflaw is so weak that drug lords can demand protection money. This solution, however, is alsoimperfect, for it might mean denying the law-abiding citizens of that country the benefitsassociated with inward investment by the multinational (i.e., jobs, income, greater economicgrowth and welfare). Clearly, the drug lord problem constitutes one of those intractable ethicaldilemmas where there is no obvious right solution, and managers need a moral compass to helpthem find an acceptable solution to the dilemma.

Utilitarian and Kantian Ethics

In contrast to the straw men just discussed, most moral philosophers see value in utilitarian andKantian approaches to business ethics. These approaches were developed in the 18th and 19thcenturies and although they have been largely superseded by more modern approaches, theyform part of the tradition upon which newer approaches have been constructed.

The utilitarian approach to business ethics dates to philosophers such as David Hume (1711–1776), Jeremy Bentham (1784–1832), and John Stuart Mill (1806–1873).Utilitarian approaches

to ethics hold that the moral worth of actions or practices is determined by their consequences.36

An action is judged desirable if it leads to the best possible balance of good consequences overbad consequences. Utilitarianism is committed to the maximization of good and theminimization of harm. Utilitarianism recognizes that actions have multiple consequences, someof which are good in a social sense and some of which are harmful. As a philosophy for businessethics, it focuses attention on the need to weigh carefully all the social benefits and costs of abusiness action and to pursue only those actions where the benefits outweigh the costs. The bestdecisions, from a utilitarian perspective, are those that produce the greatest good for the greatestnumber of people.

Many businesses have adopted specific tools such as cost–benefit analysis and risk assessmentthat are firmly rooted in a utilitarian philosophy. Managers often weigh the benefits and costs ofan action before deciding

whether to pursue it. An oil company considering drilling in anAlaskan wildlife preserve must weigh the economic benefits of increased oil production and thecreation of jobs against the costs of environmental degradation in a fragile ecosystem. Anagricultural biotechnology company such as Monsanto must decide whether the benefits ofgenetically modified crops that produce natural pesticides outweigh the risks. The benefitsinclude increased crop yields and reduced need for chemical fertilizers. The risks include thepossibility that Monsanto’s insect-resistant crops might make matters worse over time if insectsevolve a resistance to the natural pesticides engineered into Monsanto’s plants, rendering theplants vulnerable to a new generation of super bugs.

For all of its appeal, utilitarian philosophy does have some serious drawbacks as an approach tobusiness ethics. One problem is measuring the benefits, costs, and risks of a course of action. Inthe case of an oil company considering drilling in Alaska, how does one measure the potentialharm done to the region’s ecosystem? In the Monsanto example, how can one quantify the riskthat genetically engineered crops might ultimately result in the evolution of super bugs that areresistant to the natural pesticide engineered into the crops? In general, utilitarian philosophersrecognize that the measurement of benefits, costs, and risks is often not possible due to limitedknowledge.

The second problem with utilitarianism is that the philosophy omits the consideration of justice.The action that produces the greatest good for the greatest number of people may result in theunjustified treatment of a minority. Such action cannot be ethical, precisely because it is unjust.For example, suppose that in the interests of keeping down health insurance costs, thegovernment decides to screen people for the HIV virus and deny insurance coverage to thosewho are HIV positive. By reducing health costs, such action might produce significant benefitsfor a large number of people, but the action is unjust because it discriminates unfairly against aminority.

Kantian ethics are based on the philosophy of Immanuel Kant (1724–1804).Kantian ethics

holdthat people should be treated as ends and never purely asmeans

to the ends of others. People arenot instruments, like a machine. People have dignity and need to be respected as such.Employing people in sweatshops, making them work long hours for low pay in poor workingconditions, is a violation of ethics, according to Kantian philosophy, because it treats people asmere cogs in a machine and not as conscious moral beings who have dignity. Althoughcontemporary moral philosophers tend to view Kant’s ethical philosophy as incomplete—forexample, his system has no place for moral emotions or sentiments such as sympathy or caring—the notion that people should be respected and treated with dignity still resonates in the modernworld.

Rights Theories

Developed in the 20th century,rights theories

recognize that human beings have fundamentalrights and privileges that transcend national boundaries and cultures. Rights establish a minimumlevel of morally acceptable behavior. One well-known definition of a fundamental rightconstrues it as something that takes precedence over or “trumps” a collective good. Thus, wemight say that the right to free speech is a fundamental right that takes precedence over all butthe most compelling collective goals and overrides, for example, the interest of the state in civilharmony or moral consensus.37

that managers should navigate by when making decisions that havean ethical component. More precisely, they should not pursue actions that violate these rights.

The notion that there are fundamental rights that transcend national borders and cultures was theunderlying motivation for the United Nations’Universal Declaration of Human Rights, whichhas been ratified by almost every country on the planet and lays down basic principles thatshould always be adhered to irrespective of the culture in which one is doing business.38

EchoingKantian ethics, Article 1 of this declaration states:

Article 1:All human beings are born free and equal in dignity and rights. They are endowed withreason and conscience and

should act towards one another in a spirit of brotherhood.

Article 23 of this declaration, which relates directly to employment, states:

Everyone has the right to work, to free choice of employment, to just and favorable conditions ofwork, and to protection against unemployment.

Everyone, without any discrimination, has the right to equal pay for equal work.

Everyone who works has the right to just and favorable remuneration ensuring for himself andhis family an existence worthy of human dignity, and supplemented, if necessary, by othermeans of social protection.

Everyone has the right to form and to join trade unions for the protection of his interests.

Clearly, the rights embodied in Article 23 to “just and favorable work conditions,” “equal pay forequal work,” and remuneration that ensures an “existence worthy of human dignity” imply that itis unethical to employ child labor in sweatshop settings and pay less than subsistence wages,even if that happens to be common practice in some countries. These are fundamental humanrights, which transcend national borders.

It is important to note that along withrights

comeobligations. Because we have the right to freespeech, we are also obligated to make sure that we respect the free speech of others. The notionthat people have obligations is stated in Article 29 of the Universal Declaration of HumanRights:

Article 29:Everyone has duties to the community in which alone the free and full developmentof his personality is possible.

Within the framework of atheory of rights, certain people or institutions are obligated to providebenefits or services that secure the rights of others. Such obligations also fall upon more than oneclass of moral agent (a moral agent is any person or institution that is capableof moral actionsuch as a government or corporation).

For example, to escape the high costs of toxic waste disposal in the West, in the late 1980sseveral firms shipped their waste in bulk to African nations, where it was disposed of at a muchlower cost.In 1987, five European ships unloaded toxic waste containing dangerous poisons inNigeria. Workers wearing sandals and shorts unloaded the barrels for $2.50 a day and placedthem in a dirt lot in a residential area. They were not told about the contents of

the barrels.39

Whobears the obligation for protecting the rights of workers and residents to safety in a case like this?According to rights theorists, the obligation rests not on the shoulders of one moral agent, but onthe shoulders of all moral agents whose actionsmight harm or contribute to the harm of theworkers and residents. Thus, it was the obligation not just of the Nigerian government but also ofthe multinational firms that shipped the toxic waste to make sure it did no harm to residents andworkers. In this case, both the government and the multinationals apparently failed to recognizetheir basic obligation to protect the fundamental human rights of others.

Justice Theories

Justice theories focus on theattainment of a just distribution of economic goods and services. Ajust distribution

is one that is considered fair and equitable. There is no one theory of justice, andseveral theories of justice conflict with each other in important ways.40

Here we shall focus onone particular theory of justice that is both very influential and has important ethicalimplications, the theory attributed to philosopher John Rawls.41

Rawls argues that all economicgoods and services should be distributed equally except when an unequal distribution wouldwork to everyone’s advantage.

According to Rawls, valid principles of justice are those with which all persons would agree ifthey could freely and impartially consider the situation. Impartiality is guaranteed by aconceptual device that Rawls calls theveil of ignorance. Under the veil of ignorance, everyone isimagined tobe ignorant of all of his or her particular characteristics, for example, race, sex,intelligence, nationality, family background, and special talents. Rawls then asks what systempeople would design under a veil of ignorance. Under these conditions, people wouldunanimously agree on two fundamental principles of justice.

The first principle is that each person be permitted the maximum amount of basic libertycompatible with a similar liberty for others. Rawls takes these to be political liberty (e.g., theright to vote), freedom of speech and assembly, liberty of conscience and freedom of thought, thefreedom and right to hold personal property, and freedom from arbitrary arrest and seizure.

The second principle is that once equal basic liberty is assured,inequality in basic social goods—such as income and wealth distribution, and opportunities—is to be allowedonly

if suchinequalities benefit everyone. Rawls accepts that inequalities can be just if the system thatproduces inequalities is to the advantage

of everyone. More precisely, he formulates what hecalls thedifference principle,

which is that inequalities are justified if they benefit the position ofthe least-advantaged person. So, for example, wide variations in income and wealth can beconsidered just if the market-based system that produces this unequal distribution also benefitsthe least-advantaged members of society. One can argue that a well-regulated, market-basedeconomy and free trade, by promoting economic growth, benefit the least-advantaged membersof society. In principle at least, the inequalities inherent in such systems are therefore just (inother words, the rising tide of wealth created by a market-based economy and free trade lifts allboats, even those of the most disadvantaged).

In the context of international business ethics, Rawls’s theory creates an interesting perspective.Managers could ask themselves whether the policies they adopt in foreign operations would beconsidered just under Rawls’s veil of ignorance. Is it just,for example, to pay foreign workersless than workers in the firm’s home country? Rawls’s theory would suggest it is, so long as theinequality benefits the least-advantaged members of the global society (which is what economictheory suggests). Alternatively, it is difficult to imagine that managers operating under a veil ofignorance would design a system where foreign employees were paid subsistence wages to worklong hours in sweatshop conditions and where they were exposed to toxic materials. Suchworking conditions are clearly unjust in Rawls’s framework, and therefore, it is unethical toadopt them. Similarly, operating under a veil of ignorance, most people would probably design asystem that imparts some protection from environmental degradation toimportant globalcommons, such as the oceans, atmosphere, and tropical rain forests. To the extent that this is thecase, it follows that it is unjust, and by extension unethical, for companies to pursue actions thatcontribute toward extensive degradation

of these commons. Thus, Rawls’s veil of ignorance is aconceptual tool that contributes to the moral compass that managers can use to help themnavigate through difficult ethical dilemmas.

Ethical Decision Making

What, then, is the best way for managers in a multinational firm to make sure that ethicalconsiderations figure into international business decisions? How do managers decide upon anethical course of action when confronted with decisions pertaining to working conditions, humanrights, corruption,

and environmental pollution? From an ethical perspective, how do managersdetermine the moral obligations that flow from the power of a multinational corporation? Inmany cases, there are no easy answers to these questions, for many of the most vexing ethicalproblems arise because very real dilemmas are inherent in them and no correct action is obvious.Nevertheless, managers can and should do many things to make sure they adhere to basic ethicalprinciples and routinely insert ethical issues into international business decisions.

Here we focus on five things that an international business and its managers can do to make sureethical issues are considered in business decisions. These are to (1) favor hiring and promotingpeople with a well-grounded sense of personal ethics; (2) build an organizational culture thatplaces a high value on ethical behavior; (3) make sure that leaders within the business not onlyarticulate the rhetoric of ethical behavior but also act in a manner that is consistent with thatrhetoric; (4) put decision-making processes in place that require people to consider the ethicaldimension of business decisions; and (5) develop moral courage.

Hiring and Promotion

It seems obvious that businesses should strive to hire people who have a strong sense of personalethics and would not engage in unethical or illegal behavior. Similarly, you would not expect abusiness to promote people whose behavior does not match generally accepted ethicalstandards—you might expect the business to fire them.

However, actually doing so is verydifficult. How do you know that someone has a poor sense of personal ethics? In our society, wehave an incentive to hide a lack of personal ethics from public view. Once people realize you areunethical, they will no longer trust you.

Is there anything businesses can do to make sure they do not hire people who subsequently turnout to have poor personal ethics, particularly given that people have an incentive to hide thisfrom public view (indeed, the unethical person may lie about his or her nature)? Businesses cangive potential employees psychological tests to try to discern their ethical predisposition, andthey can check with prior employers regarding someone’s reputation (e.g., by asking for lettersof reference and

talking to people who have worked with the prospective employee). The latter iscommon and does influence the hiring process. Promoting people who have displayed poorethics should not occur in a company where the organization culture values the need forethicalbehavior and where leaders act accordingly.

Not only should businesses strive to identify and hire people with a strong sense of personalethics, but it also is in the interests of prospective employees to find out as much as they canabout the ethical climate in an organization. Who wants to work at a multinational such as Enron,which ultimately entered bankruptcy because unethical executives had established riskypartnerships that were hidden from public view and that existed in part to enrich those sameexecutives?Table 4.1

To foster ethical behavior, businesses need to build an organization culture that values ethicalbehavior. Three things are particularly important in building an organization culture thatemphasizes ethic